The Trump tax plan simplifies the tax structure but increases the debt by $1.5 trillion. A third of tax payers would not benefit.
On November 2, 2017, the House Ways and Means Committee released its tax reform plan. It’s based on the Trump administration plan released on September 27, 2017.
The Tax Cuts and Jobs Act would cut income tax rates, lowering the top rate to 35 percent. It doubles the standard deduction but eliminates personal exemptions. The plan would reduce the corporate tax rate from 35 percent to 20 percent.
Here’s a summary of how Trump’s tax plan would change income taxes, deductions for child and elder care, and business taxes.
Income Tax Brackets
The House plan would reduce the current seven tax brackets to four. It keeps a top rate of 39.5 percent for high earners.
The Tax Act lowers income tax rates. The lowest tax bracket would be 12 percent, down from 15 percent. The middle rate would be 25 percent, down from 28 percent. The third bracket would be taxed 35 percent, down from 39.6 percent. The top bracket would retain the 39.6 percent tax rate.
The House plan creates the following tax chart.
|Income Tax Rate||Income Levels for Those Filing As:|
|10 – 15%||12%||$0-$44,999||$0 – $89,999|
|25 – 28%||25%||$45,000 – $199,999||$90,000 – $259,999|
|28 – 39.6%||35%||$200,000 – $499,999||$260,000 – $999,999|
The tax plan eliminates itemized deductions except for those on charitable contributions, mortgage interest, property taxes, and retirement savings. But it only allows the mortgage deduction for new mortgages of $500,000 or less.
It also means no deductions for medical expenses. Currently, people can deduct medical expenses that are 10 percent or more of income.
It eliminates the deduction for state and local taxes. That would hurt 40 million people, primarily residents in high-tax states like California and New York. It would add $1.3 trillion to federal revenues.
The plan does allow taxpayers to deduct state property tax deductions up to $10,000.
Trump’s tax plan doubles the standard deduction for everyone. The deduction for Married and Joint Filers would rise from $12,700 to $24,000. Single filers’ deduction would increase from $6,300 to $12,000.
The Tax Act eliminates personal exemptions. The exemption currently allows taxpayers to subtract $4,050 from income for each person claimed on the tax return. Families with many children would pay higher taxes under the Tax Act despite the increased standard deductions. For example, a married couple with two children making $56,000 a year would pay $68 a year more. The increased deduction doesn’t outweigh their loss of the exemption.
The House plan doubles the estate tax exemption from $5.49 million to $11 million. It phases out the estate tax and the generation-skipping transfer tax in six years. That would help the top 1 percent of the population who pay it. That’s 4,918 tax returns, but they contribute $17 billion in taxes.
The Tax Act eliminates the Alternative Minimum Tax. That helps those who make enough to be subject to it. In 2017, the AMT could affect those with incomes above $54,300 (single) or $84,500 (married filing jointly).
Child and Elder Care Deductions
The Tax Act increases the Child Tax Credit from $1,000 to $1,600. It increases the income level so more middle-income families can take advantage of the credit.
It eliminates the marriage penalty as it relates to the Child Tax Credit. Under the current tax system, two single parents receive the full credit up to a combined income of $150,000. But the credit shrinks for a married couple after they earn $110,000. Research shows that subsidizing child care encourages people to work. That boosts income and economic growth.
The House plan allows a $300 credit for non-child dependents. Trump’s 2016 plan gave a $5,000 deduction for elder care.
The Tax Act would lower the maximum corporate tax rate from 35 percent to 20 percent. The cut is not permanent.
Congress kept it for just 10 years to keep costs down. The United States has one of the highest corporate tax rates in the world. But that doesn’t hurt large corporations. Most of them don’t pay more than 15 percent. That’s because they can afford tax attorneys who help them avoid paying more.
The House plan lowers the maximum tax rate for small businesses to 25 percent. That includes sole proprietorships, partnerships, and S corporations. Many of those are real estate companies, hedge funds, and private equity funds. As a result, 85 percent of this tax cut benefits the top 1 percent of earners. Most mom-and-pop small businesses don’t earn enough income to be taxed more than 25 percent. The reduced rate doesn’t apply to labor-intensive firms like lawyers and financial services.
The Tax Act allows all businesses to expense the cost of depreciable assets instead of writing them off over the years. It does not apply to structures. This feature expires in five years. Trump promised U.S.-based manufacturers they could deduct all expenses for new plants and equipment. The write-off would encourage more investment.
C corporations would lose the ability to deduct interest expense. That would make it more expensive for financial firms to borrow money to lend and invest. Companies would be less likely to issue bonds and buy back their stock. That could cause stock prices to fall. But the repeal would generate $1.5 trillion in revenue to pay for other tax breaks.
The plan advocates a “territorial” tax system. It would not tax income that businesses earn in other countries. But it does impose a 10 percent tax on high-profit foreign subsidiaries. It allows a one-time tax on profit stockpiles, whether earned domestically or overseas. The tax is 12 percent on cash and 5 percent on illiquid assets. on past income earned overseas. That’s a worse deal than the 10 percent tax in Trump’s Five-Part tax plan.
The goal is to encourage companies to repatriate $2.6 trillion in foreign cash. They’ve hoarded it to avoid paying taxes. But the Congressional Research Service found that a 2004 tax holiday provided little boost to the economy. Companies distributed repatriated cash to shareholders, not employees.
Trump’s Promises No Longer in the Plan
Trump’s 2016 plan allowed up to $2,000 to be deposited tax-free into a Dependent Care Savings Account. That allows earnings to grow tax-free to pay for a child’s education at age 18. Taxpayers who were eligible for the Earned Income Tax Credit would receive a rebate. They could use that rebate for the DCSA.
Trump promised to end the Obamacare tax on investment income. He also called for Congress to eliminate the tax penalty on those who didn’t get health insurance.
How It Affects You
The Tax Policy Center hasn’t had a chance to analyze the House plan. But earlier it had said that Trump’s Unified Tax Reform Framework would increase the $20 trillion national debt by $7 trillion over the next 10 years. That takes into account any boost in growth. It also folds in the cumulative interest that would accrue from the debt.
An increase in the U.S. debt would dampen economic growth in the long run. When a country’s debt-to-GDP-ratio is more than 100 percent, investors get concerned. They demand higher yields on the nation’s bonds, increasing interest rates. Those higher rates slow growth.
The Tax Policy Center added that Trump’s 2017 plan would reduce U.S. gross domestic product after 2024. The interest payment on the debt would consume a large portion of the federal budget. That money wouldn’t be available to build infrastructure or other job-creation uses.
Trump’s tax reform plan would help the wealthy more than the middle class. Once all the deductions and exemptions are factored in, the poorest fifth of the population receives a tax break of 0.5 percent to 0.2 percent. They were better off under Trump’s Five-Part Plan, where they received a 0.6 percent boost.
The tax break improves for each income level. The top 1 percent would get an 8.5 percent break. That’s better for them than Trump’s Five-Part plan, which gave a 6.5 percent break. This favoritism to the wealthy is why Trump’s tax plan increases the debt so much. The most affluent Americans contribute the lion’s share to total tax revenues.
More than a third of taxpayers already have incomes that fall below their standard deduction and personal exemptions. They wouldn’t benefit at all from the Framework plan, according to New York University law professor Lily Batchelder.
The Framework hurts parents of school-age children because they lose the personal exemption for each child. That means almost 10 million parents will see their taxes increase.
The Framework doesn’t mention the head of household filing status. But Trump’s earlier plan eliminated it. That would hurt single-parent families.
Will Trump’s Tax Cuts Work?
The administration is relying on supply-side economics. That theory advocates giving tax cuts to businesses so they can create jobs. It worked during the Reagan administration because the highest tax rate was 70 percent. According to the Laffer Curve, that’s in the prohibitive range. That’s when taxes are high enough that cuts can boost the economy out of debt. But the 2017 tax rates are half what they were in the 1980s. For that reason, trickle-down economics no longer works.
No matter how low taxes are, corporations won’t add jobs to build products until they see demand for them. That’s why it makes economic sense to give the most significant tax cuts to the poor and middle class. They are more likely to spend every dollar they get. The wealthy use tax cuts to save or invest. It helps the stock market but doesn’t drive demand. Once demand is there, then businesses create jobs to meet it. That’s the best way for tax cuts to create jobs.
Will It Pass?
The tax cut plan must prove it won’t increase the deficit beyond what’s in the FY 2018 budget. The House and Senate Budget Committees are on track to add $1.5 trillion over the next 10 years to the budget to pay for the tax reform plan. That’s after cutting $473 billion from Medicare and $1 trillion from Medicaid.
On October 19, the Senate approved the budget. The House passed it on October 26. The House Freedom Caucus endorsed the plan. Budget-conscious Republicans have done an about-face. The party fought hard to pass sequestration. In 2011, some even threatened to default on the debt rather than keep adding to it. Now they say that the tax cuts would boost the economy so much that the additional revenues would offset the tax cuts. They ignore the reasons why Reaganomics would not work today.
The next step is for the House to debate the Tax Act, then vote on it. The Senate Finance Committee aims to finish its plan before Thanksgiving. If it adheres to the budget requirements, it can pass the Senate with a 51-vote majority. Otherwise, it would require a 60-vote majority to pass. Then the plan is dead. Democrats wouldn’t support a bill that benefits the rich more than the poor.
The House and Senate must then reconcile the two bills, vote on the final bill, and send it to the president before the end of the year. That’s a very ambitious deadline. Normally that process would last until January 2018.
The National Association of Home Builders and the National Association of Realtors oppose increasing the personal deduction and reducing the mortgage deduction. As more taxpayers take a standard deduction, fewer would take advantage of the mortgage interest deduction. That would hurt home sales.